Europe’s tipping point: investing in strategic autonomy

Just as Europe has depended on the US for its defence for many decades, so global investors have often depended on the returns of US financial assets. Europe’s geopolitical wake-up call from the Trump administration has catalysed long-term public spending commitments as the continent unites around a common objective. That will generate fresh opportunities in its financial markets.

As the US government redraws the global order, sidelining Europe, the region and Germany in particular, has scrambled together a historic response with far-reaching consequences. The transatlantic rift has generated an 11th-hour response to the fundamental question of whether Europe relies on Mr Trump and a US-led NATO for their security.

That a US administration no longer shares the same values as Europe’s democracies could not be clearer. That the US may become an economic rival rather than an ally, is suddenly thinkable. The language of ‘America First’ is already translating in the capitals of Europe into tough strategic choices and plans for greater economic, military and diplomatic autonomy from the US. There is now a real chance that President Trump, along with President Putin, are triggering a result that neither seemingly want. They are uniting the Western world, minus the US, and so creating a catalyst for what they look to be trying to temper: a unified Europe allied with other Western countries such as Canada and Australia. The world’s map is being redrawn.

Capital flows out of the US and into European markets have accelerated, after three years of European market underperformance

At the trade level, the Trump administration is dismantling an unwritten pact of recent decades: Americans buy European goods, in return Europeans buy American services and invest in US financial assets (the Trump administration neglects to notice that the US has a trade surplus with Europe in services). Foreign investment therefore serves to support the US’s ability to finance its budget and trade deficits, while lowering consumer borrowing costs and underpinning the US dollar’s strength.

Read also: Rethink Perspectives – Navigating complexity in the face of tariffs, geopolitical fragmentation and AI

In the US, the uncertainties of an erratic trade policy are stalling corporate spending, raising concerns in financial markets about an economic slowdown. Capital flows out of the US and into European markets have accelerated, after three years of European market underperformance. At the start of this year, European valuations were at record discounts compared with global and US equity markets. Europe’s package of fiscal responses is also improving the region’s growth outlook and we expect fewer interest rate cuts by the European Central Bank, taking its benchmark rate towards 1.75% by the year-end.

Can Europe continue to outperform? In the near term, much of the improvement looks incorporated in prices, the movements seem overdone, and the market faces US tariff headwinds. The long-term impact of the new fiscal boost will be key. On a three-to-six month investment horizon, we prefer cyclical sectors such as luxury cars and personal goods, or semiconductors, over defensives for global equity portfolios. We believe that investors should focus on diversifying portfolios and seize opportunities in defence, infrastructure, and renewable energy sectors.

Europe has the fiscal room to raise fresh debt and implement strategic initiatives

Read also: Five investment takeaways from Trump’s Congressional address

Longer term, coordinated European efforts to invest in the continent’s infrastructure, militaries and technology could widen global investors’ choices. And as we have just seen, we should not underestimate Europe’s ability to act under pressure. Despite the region’s challenges, US policy is supplying the motivation for real change. Moreover, Europe has the fiscal room to raise fresh debt and implement strategic initiatives, as bond markets have clearly signalled.

related content.

investment insights

Infrastructure opportunity follows political priorities, and threats

March 4, 2025

investment solutions.

learn more

Europe is at a tipping point and, while daunting, the challenges offer a chance for the continent to assert its strategic independence and secure its future. Investments, along with more politically stable core governments, are making it a more appealing prospect for international investors.

Deterrence is cheaper than war and, as Europe is recognising, maybe belatedly, investment is a prerequisite for economic resilience and autonomy over the long run.